Important: Investors should develop a differentiated market assessment before buying, since a discount certificate is not suitable as an investment instrument for either sharply rising or falling markets – in the first case, the profit is limited to the maximum amount, in the second case, capital preservation becomes increasingly uncertain. The position of the cap in relation to the current price of the underlying is the control instrument for individual risk tolerance or expected returns.
In order to trade discount certificates, you must first determine an underlying asset for the certificate and also an issuer such as Vontobel*, Societe Generale* or choose DZ Bank.
Basically, three strategies can be distinguished:
Investors pursuing a defensive strategy choose the lowest possible cap. The lower the cap, the greater the discount, but the lower the possible maximum return. A high discount helps to achieve a positive return even if the price of the underlying is negative. It must always be considered that even a very low cap cannot replace a capital protection function.
On the other hand, anyone who wants to implement a neutral strategy with discount certificates will prefer a cap equal to the current price level of the underlying. The discount is lower, but the maximum return increases for the somewhat higher willingness to take risks. In this case, a sideways movement of the underlying is sufficient to realize the product’s maximum return.
A more offensive strategy is advisable if investors expect the price of the underlying to continue to rise and therefore choose a cap above the current price. It is important here that this cap is not too far above the current price. If the discount drops to almost zero percent, investors shouldn’t accept any profit caps either.